Judge approves settlement of insider-trading probe

SAC Capital Advisors LP's landmark settlement of a U.S. government insider-trading probe stretching back to 2007 was approved by a federal judge, bringing to an end the hedge fund's role as a money manager and capping a decade of insider trading cases. The judge is still discussing the terms of the agreement, which calls for a combined penalty of $1.8 billion, with the lawyers in Manhattan federal court.

SAC Capital, which this week changed its name to Point72 Asset Management LP, was indicted by a federal grand jury last year for reaping hundreds of millions of dollars in illegal profits and fostering a culture of criminality that encouraged brazen insider trading by its employees.

Though never able to charge or even sue founder Steven A. Cohen, the government managed to snare eight current or former employees through guilty pleas and trial convictions. Cohen, 57, who has consistently denied wrongdoing, is the subject of an administrative proceeding by the Securities and Exchange Commission, which claims the billionaire failed to supervise employees to ensure they complied with securities laws.

"Both sides in this case can claim victory," said Doug Burns, a former federal prosecutor. "Cohen can say 'they didn't have the ability to prosecute me individually because I did nothing wrong.' And the government gets to say this was a place with a horrid culture and while the evidence didn't enable us to prosecute Steve Cohen, we got a very, very sizable monetary fine out of the culmination of all our efforts."

The plea deal ends both the prosecution and money- laundering lawsuit brought by the office of Manhattan U.S. Attorney Preet Bharara. The agreement includes a $900 million fine to end the criminal case, as well as a separate $900 million judgment the hedge fund agreed to pay to end the suit. Within that judgment is $616 million Cohen agreed to pay the SEC to settle a separate lawsuit filed last year.

As part of the plea deal, the firm agreed to manage money mainly for Cohen alone.

SAC Capital's conviction is the apex of a seven-year effort by the Justice Department to root out market cheating not only at hedge funds, but among insiders at publicly traded companies and so-called expert-networking firms.

Those firms, middle-men who put company insiders together with traders to provide industry insight, were the new twist of modern-day market manipulation. The Federal Bureau of Investigation in New York upped the ante as well, leveraging wiretaps and surveillance measures previously reserved for mobsters and drug dealers, to catch Wall Street criminals.

The initiative has netted convictions and guilty pleas of about 80 people charged since August 2009.

Federal prosecutors have said the SAC Capital settlement "represents an amount that is several times larger than the illicit gains and avoided losses resulting from the insider- trading."

U.S. District Court Judge Richard Sullivan, who presided over the money-laundering suit, previously approved that settlement, which included a $284 million payment from SAC Capital, in addition to what Cohen agreed to pay the SEC.

Bharara called SAC "a veritable magnet for market cheaters" in announcing the indictment in July, and said the U.S. had determined the insider-trading scheme dated back to 1999, spanned more than a decade and involved at least 20 public companies.

"When so many people from a single hedge fund have engaged in insider trading, it is not a coincidence," Bharara said at the time. "It is, instead, the predictable product of substantial and pervasive institutional failure."

To date, former SAC employees Noah Freeman, Donald Longueuil, Wesley Wang, Richard Choo-Beng Lee, Jon Horvath and Richard Lee have all pleaded guilty to insider trading as part of the Justice Department's investigation of the hedge fund, which drew federal scrutiny in part due to its reputation for very high rates of return on client investments.

Since he started his firm in 1992, Cohen has achieved average annual returns of 30 percent, one of the best records in the industry's history. He had just one money-losing year: 2008, when his main fund tumbled 19 percent.

In December, Michael Steinberg, SAC's longest-serving portfolio manager to be accused of wrongdoing, was convicted of conspiracy and securities fraud after a five-week trial.

This year, Mathew Martoma, a former SAC fund manager, was found guilty of using secret information about the clinical trial of an Alzheimer's drug to trade in shares of Elan Corp. and Wyeth. Prosecutors called Martoma's insider-trading scheme, which netted SAC Capital $275 million, the biggest single insider trading event in U.S. history.

Steinberg and Martoma, who have yet to be sentenced, face as long as 20 years in prison.

Two others SAC employees, Jonathan Hollander and Ron Dennis, were sued by the SEC for insider trading. Both settled with the regulator, paid fines and didn't admit or deny wrongdoing.

SAC and three of its units sought to plead guilty last year to four counts of securities fraud and one count of wire fraud.